Modvat/Cenvat credit on fuel for captive power generation upheld despite part of the electricity being wheeled out.

Naphtha used as fuel in a factory for generating electricity was treated as an eligible input for Modvat/Cenvat credit because it fell within the inclusive definition of input and no separate nexus with the final product was required once the fuel was received in the factory and not removed as such. The restriction relating to inputs used in exempted goods was held inapplicable, as electricity was not treated as exempted goods under the relevant rules. Credit was therefore not denied merely because part of the electricity was wheeled out to another unit, and the related penalty could not stand. The dissent would have denied credit on the portion attributable to supply to a sister concern, while setting aside penalty.

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Issues: Whether modvat/cenvat credit was admissible on naphtha used as fuel in the factory for generation of electricity when part of the electricity was captively consumed and part was wheeled out to another unit, and whether denial of credit and penalty were sustainable.

Analysis: The majority held that naphtha used as fuel fell within the inclusive part of the definition of input, and that no separate nexus with the final product was required once the fuel was received in the factory and not removed as such. The restriction applicable to inputs used in the manufacture of exempted goods was held inapplicable because electricity was treated as goods but not as exempted goods within the relevant tariff and credit rules. The majority further held that wheeling out electricity to another own unit did not defeat entitlement to credit on the fuel used in generating that electricity. On that basis, the demand could not survive and there was no basis for penalty.

Conclusion: Credit on naphtha was admissible and the denial of credit and penalty were unsustainable, in favour of the assessee.

Dissenting Opinion: The Member (Judicial) held that credit on the portion of fuel attributable to electricity supplied to the sister concern was not admissible, though the penalty was set aside.

Final Conclusion: The appeals succeeded and the impugned order was set aside with consequential relief.

Ratio Decidendi: Fuel specifically included within the definition of input is eligible for credit when used in the factory, and credit cannot be denied merely because electricity generated from such fuel is partly wheeled out, unless the statutory restrictions expressly apply.

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